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PRECEDENTS FOR DEFINING CAPITAL 



IRVING FISHER 

Yale University 



reprinted from 
The Quarterly Journal of Economics 
Vol. XVIII., May, 1904 ' 



. . . THE . . . 

QUARTERLY JOURNAL OF ECONOMICS 

Published for Harvard University 

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of Economics, Cambridge, Mass.; business communications and subscriptions 
($3.00 a year), to Geo. H. Ellis Co., 2J2 Congress Street, Boston, Mass. 



F. Y. Edgeworth 



CONTENTS FOR FEBRUARY, 1904. 

I. THE THEORY OF DISTRIBUTION ....... 

II. THE RICARDIAN THEORY OF GOLD MOVEMENTS AND 

PROFESSOR LAUGHLIN'S VIEWS OF MONEY ' . A. C. Whitaker 

III. THE FUND AT BOSTON IN NEW ENGLAND . Andrew McFarland Davis 

IV. THE MASSACHUSETTS BUSINESS CORPORATION LAW . Grosvenor Calkins 



NOTES AND MEMORANDA: 

The Variation of Productive Forces : Further Comment 
Canal Enlargement in New York State .... 

The New Nebraska Revenue Law 

Car Service Reform in the United States 

The Steel Corporation's 3ond Conversion: A Correction 

RECENT PUBLICATIONS UPON ECONOMICS 



A. W. Flux 

John A. Fairlie 

Victor Rosewater 

W. H. Price 

. Edward B. Whitney 



CONTENTS FOR MAY, 1904. 



I. THE END OF THE MEXICAN DOLLAR 

II. THE DOCTRINE OF THE DISTRIBUTION OF MAINTE- 
NANCE AND SOME OF ITS APPLICATIONS 

III. PRECEDENTS FOR DEFINING CAPITAL 

IV. THE NEW YORK BUILDING TRADES . 

NOTES AND MEMORANDA: 

The Variation of Productive Forces : A Rejoinder .... 
Darwin's Municipal Trade 



RECENT PUBLICATIONS UPON ECONOMICS. 



Gift. 
23JHv'ft§ 



A. Piatt Andrew 

Charles W. Mixter 

Irving Fisher 

John R. Commons 

Charles J. Bullock 
T. N. Carver 




PRECEDENTS FOR DEFINING CAPITAL. 
I. 

Professor Nicholson, in his latest work writes: "On 
the meaning and the functions of capital, volumes have 
been written, and, to judge by the economic journals, 
volumes are still being written and no doubt will continue 
to be written. Properly viewed, this is not a matter for 
regret, as it simply indicates that capital is one of the 
most far-reaching conceptions." 1 

In immediate fulfilment of this prophecy appears an 
article in the November number of this Journal by Pro- 
fessor Charles A. Tuttle. 2 This article is, I believe, a 
step in the right direction, and will help ultimately to 
clear away much of the confusion which still pervades 
this subject. But, as Professor Tuttle seems to believe 
that his conception of capital is essentially different 
from the one which I have advocated, 3 and that his defi- 
nition has the indorsement of ancient usage, while mine 
has not, it seems advisable, without repeating what I 
have already written, to re-examine briefly some of the 
points at issue. I shall at the same time take this op- 
portunity to consider the somewhat similar objections to 
my treatment of capital which were raised a few years 
ago by Professor Alfred Marshall and Professor Frank A. 
Fetter. 

The problem of definition is always twofold: it is partly 
a matter of words and partly a matter of ideas. In short, 
a definition has to meet the requirements both of termi- 

i Elements of Political Economy (Macmillan, 1903), p. 41. 

2 "The Real Capital Concept." pp. 54-96. 

s " What is Capital ? " Economic Journal, Decern her, 1896 ; " Senses of Cap- 
ital," ibid., June, 1897; "The Role of Capital in Economic Theory," ibid., De- 
cember, 1897. 



*3> 






nology and of science. The scientific procedure starts 
with an idea, and seeks to find a name to fit it. The pro- 
cedure of terminology, on the other hand, starts with a 
name already in popular use, and seeks some accurate 
idea to interpret its meaning. These two processes, pro- 
ceeding in opposite directions, do not always reach com- 
mon ground, from which fact arise most of the disputes 
as to definitions. Sometimes it is impossible to satisfy 
the requirements both of terminology and of science. In 
such a case the scientist usually ignores the former en- 
tirely, either discarding the popular terms or giving them 
meanings which are confessedly arbitrary and indepen- 
dent of former usage, justifying his high-handedness by 
the utility of his definitions in scientific analysis. But, 
when it is possible to obey at once the behests of usage 
and analysis, it is expedient, if not obligatory, to do so. 
This is, I am persuaded, the case with capital, when de- 
fined as "a stock (of wealth or property, or the value of 
either) existing at an instant of time," as distinguished 
from income, which is a flow through a period of time. 

The distinguishing characteristic of this definition is 
that it makes the capital-concept depend not on the 
classification of wealth, but on its relation to time. For 
its scientific justification it is claimed that this concept 
plays an important role in the analysis of the so-called 
"problems of capital," in particular the problem of in- 
terest. This role, as I conceive it, has already been 
sketched briefly; 1 and I hope soon to show more particu- 
larly how the proposed definition is suited to the study 
of the theory of interest. 

But those who have rejected this definition of capital 
have usually done so, not on the ground that it was un- 
fitted to solve the "problems of capital," but that it was 
too radical a departure from established usage; in other 

*"The Role of Capital in Economic Theory," Economic Journal, Decem- 
ber, 1897. 



words, because it failed to satisfy the requirements, not 
of science, but of terminology. Says Professor Marshall :* — 

If I understand his [my] position rightly, the difference between 
us is very small and is mainly one of words. . . . Continuity of tra- 
dition is important everywhere ; it is nowhere more important than 
in our use of terms .... a breach with tradition as regards notions 
should be deferred so long as there remains any considerable doubt 
as to its wisdom. If one is in doubt whether the landscape would 
be improved by cutting down an old oak, the oak should be left 
yet a little while. 

Professor Fetter 2 speaks of my definition of capital as 
a "radical proposal in economic terminology. ... A final 
objection is that the term 'capital' is made synonymous 
with wealth, and two good words are employed in the 
same sense." 3 

Professor Tuttle writes: 4 — 

But why apply to the so-called "stock" of economic goods in 
existence at a given instant the name capital? To this question 
Professor Fisher has not given a convincing answer. . . . That the 
distinction between "a stock" and "a flow" or "a rate of flow" 
is an important one, the writer of this article does not doubt. 
But he can find no justification in etymology or "in history or in 
popular and business usage " for the application of the term " cap- 
ital" to such "a stock." The conception is adequately and scien- 
tifically characterized by the phrase "the existing stock of economic 
goods at an instant of time." To apply the term " capital " to it 
is not only confusing, but arbitrary and wasteful of terminology. 

1 " Distribution and Exchange," Economic Journal, vol. viii., 1898, pp. 
55-58. 

2 Quarterly Journal of Economics, November, 1900, p. 18. 

3 Besides these objections on the ground of terminology, Professor Fetter 
raises others on the ground of scientific expediency ; but these are evidently 
due to a misunderstanding on his part. He seems to think that I restrict the 
meaning of capital to concrete wealth rather than the value of wealth, and 
that I do not admit "services" under income. But these are both prominent 
theses of mine, the former in the second Economic Journal article, the latter 
in the third. Possibly Professor Fetter conceived his objections after reading 
the first of the three articles, without sufficiently examining the other two. 

< "The Real Capital Concept," p. 75. 



The issue is thus squarely presented whether the appli- 
cation of the term "capital" to "a stock of wealth exist- 
ing at an instant of time" is good terminology, and, in 
particular, whether it is consistent with or in violation 
of former usage. 

To many this question, being one of words only, will 
not seem to merit extended discussion. Indeed, this has 
been my own opinion; and accordingly it received scant 
attention in the three articles in the Economic Journal. 1 
But it is evident from the foregoing criticisms, and others 
which might be mentioned, that the principal obstacle 
to the acceptance of the proposed definition and the con- 
ception which it carries with it is the belief that it is an 
innovation in terminology. That Marshall gives so much 
weight to tradition is, of itself, sufficient reason for giving 
it a thorough and respectful hearing: especially as he 
leads tradition more than he follows it. 

II. 

There are two sources to which we must look for the 
justification of economic terms: first, economic usage; and, 
second, popular and business usage. 

As to economic usage, it must be evident to any one 
who has compared the various authors that, since the time 
of Adam Smith, there has been no established usage what- 
ever. 2 On the contrary, the most of what has been writ- 
ten on this vexed subject has consisted in making existing 
confusion worse confounded. Senior said, nearly seventy 
years ago, — 

Capital has been so variously denned that it may be doubtful 
whether it have any generally received meaning. 3 

1 See " What is Capital? " Economic Journal, December, 1896, p. 517. 

J For a fuller presentation of this phase of the subject, see " What is Capi- 
tal?'" Economic Journal, December, 1896, p. 520; also, Tuttle, "The Real 
Capital Concept," Quarterly Journal of Economics, November, 1903, p. 54. 

Encyclopaedia Metropolitrana, vol. vi. p. 153. 



And in recent years Professor Bohm-Bawerk 1 repeats 
the lament: — 

Almost every year there appears some new attempt to settle 
the disputed conception, but, unfortunately, no authoritative re- 
sult has as yet followed these attempts. On the contrary, many 
of them only served to put more combatants in the field and fur- 
nish more matter to the dispute. 

Any one who attempts to pick out from the mass of 
definitions which have been proposed some common ele- 
ments will find them so vague and general as to apply 
to all wealth. The dividing line between wealth which 
is capital and wealth which is not is totally different in 
each definition, and even different in each interpretation 
of the same definition. This part of the subject was 
treated at length in a former article. 2 It was there shown, 
for instance, that Adam Smith's definition excludes a 
dwelling occupied by the owner, as bringing no revenue, 
while Hermann's definition includes dwellings as "dur- 
able" goods. On the other hand, a fruiterer's stock in 
trade is capital according to Smith, because used for 
profit, but is apparently not, according to Hermann, 
because perishable. To Kleinwachter, capital consists 
only of "tools" of production, such as a railway, and 
excludes food, for instance, as passive. Jevons, on the 
contrary, makes food the most typical capital, and ex- 
cludes a railway, except as representing the sustenance 
of the laborers who built it. Mill makes the distinction 
depend upon the mind of the capitalist; Marx and 
M'Culloch, on its effect on the laborer, the effect being, 
according to the first, exploitation, according to the sec- 
cond, maintenance; while most of the others take into 
account neither of these conditions. And so we might 
go on enumerating discrepancies. 

1 Positive Theory of Capital, English translation, London, 1891, p. 23. 

2 "What is Capital? " Economic Journal, December, 1896. 



6 

If there exists anywhere evidence of established usage 
among economists, I have not been able to find it. It 
is certainly not found by comparing the classical authors: 
Turgot, Adam Smith, Ricardo, Malthus, Mill, Senior, 
M'Cullough, Say, Roscher; nor by comparing the current 
text-books of, for instance, Marshall, Sidgwick, Nicholson, 
Hadley, Wagner, Schmoller, Pareto, Leroy-Beaulieu, Gide, 
Pierson; nor in the dictionaries of political economy of 
Palgrave, Block, Lexis, and Macleod; nor again in the 
popular dictionaries. On the contrary, the bulk of what 
these authorities say on capital (and most of them say 
a great deal) is critical and controversial. So far as any 
guidance to the follower of precedent is concerned, the 
matter is summed up in A. J. Schem's Deutsch-ameri- 
kanisches Conversations-Lexicon. (New York, 1872) : — 

Kapital oder Capital . . . bei weitem der wichtigste Begriff in der 
Volkswirthschaftslehre (Nationalokonomie), aber auch bei weitem 
der streitigste. . . . 

Abandoning, then, the impossible task of discovering 
what is the accepted economic usage, let us turn to the 
usage of the business man and the general public which 
is innocent of political economy. It will surprise many 
academic economists, as it certainly did me, that a study 
of this phase of the subject shows: (1) that before Adam 
Smith no 1 precedent is found for definitely and avowedly 
dividing stock into two parts, only one of which is 
capital, but that stock and capital were practically syn- 
onymous; (2) that the definitions before the time of Adam 
Smith, while they all conflict with him and most other 
economists, are in substantial agreement with each other; 

1 Since the above was written, I note a probable exception quoted by 
Umfenbach, Das Kapital in seiner Kulturbedeutuny (Wiirzburg, 1879), p. 32: 

1776, Kriinitz, Encyclopddie, Band 7, "Capital (lat. sors.) nennt man eine 
Summe Geldes sofern sie dazu bestimmt ist, Gewinn zu briugen, im Gegen- 
satz dieses Gewinnes." The Italics are mine. 

As the date of this Encyclopaedia is the same as that of the appearance of 
The Wealth of Nations, it is possible, though not probable, that the author 
was influenced by Adam Smith. We note that he contrasts capital with 
" Gewinn," a floiv and not a part of stock. 



(3) that present popular and business usage continues to 
follow the pre-Smith usage, almost wholly undisturbed by 
the economists; (4) that this continuous popular and busi- 
ness usage for three hundred years seems always con- 
sistent with and in many cases specifically identical with 
the conception of capital here advocated. 

Since the best index of usage is in the work of lexicog- 
raphers, they being the ones who have sought from time 
to time to record it, the basis of this part of our study is 
a comparison of seventy-two dictionaries in the Yale 
University Library (or ninety-one, if we include the differ- 
ent editions). 

The origin of the term "capital" in the western world 
is now conceded to be "capitalis pars debiti," the principal, 
or " principal part" of a debt. 1 In this sense, capital 
was defined in an early dictionary of the French Acad- 
emy: — 

1694, Dictionnaire de l'Academie francaise, Paris. — Capital, 
. . . Le sort principal d'une dette. 2 

A second and broader meaning is the value of stock in 
trade. This is found in an early Venetian dictionary: — 

1612, Vocabolario degli Accademici della Crusca. . . . Venezia. — 
Capitale, sust. [antivo] la sorte principale, che e quella quantita 
di danari, che pongono i mercatanti in sui traffichi, che si dice 
anche, corpo. Lat. sors, caput. 

The edition of 1746 has practically the same wording. 
The following is from the earliest English dictionary 
available : — 

'Bbhm-Bawerk, Positive Theory of Capital, English translation, 1891, 
p. 24. 

Knies, Das Geld (Berlin, 1885), 2d edition, p. 25. 

Some of the other terms to signify capital have a broader etymology, e.g. : 
the German Hauptstamm; the Chinese "root or trunk of a tree," "root 
money," "mother money"; and the Japanese "stem "or "origin." 

2 Other early dictionaries containing the same definition are: 1733, Grosses 
vollstandiges universal Lexicon, . . . Halle u. Leipzig; 1771, Dictionnaire uni- 
versel . . . de Tre'voux, nouveau edition, Paris. 



8 



1730, Bailey, N., Dictionarium Britannicum ; or, A more com- 
pleat . . . English dictionary. . . . London. — Capital stock [in Trade, 
etc.] is the stock or fund of a Trading Company, or the sum of 
money they jointly contribute to be employ 'd in trade. 

The edition of 1755 gives the same definition. Very 
often the term is applied to the sum originally put into 
the trade instead of to what may exist at the moment. 
For instance: — 

1759, Rider, W., A New Universal English Dictionary. . . . 
London. — Capital. Among merchants, the sum of money brought 
in by each party to make up the common stock. Likewise the 
money which a merchant first brings into trade on his own account. 1 

Sometimes, again, "capital" is applied to the sum per- 
mitted in the charter, which is now usually called by 
business men the authorized capital. 

1750, Dyche (Thomas) and Pardon (W.), A New General Eng- 
lish Dictionary. . . . 6th edition. London. — . . . capital stock, in 
trading companies, is the fund or quantity of money, they are by 
their charter allowed to employ in trade. 

1818, Nicholson, W., American edition of the British Encyclo- 
paedia, . . . Philadelphia. — Capital, among merchants, traders, and 
bankers, signifies the sum of money which individuals bring, to 
make up the common stock of a partnership when it is first formed. 
. . . The word capital is opposed to that of profit or gain, though 
the profit often increases the capital, and becomes itself a part of it. 

The question now arises, Are the foregoing definitions 
to be interpreted as restricting the meaning of the term 
absolutely to trade-capital? Or is the phrase "in trade," 
by which the definitions are often preceded, simply meant 
to specify the sphere in which the term is generally found, 
just as the definitions of "cornice" are under the heading 
"architecture," "inventory" under "law," or "hawser" 

i Other early examples giving practically the same definition as the fore- 
going are: 1763, D. Fenning, The Royal English Dictionary, ... 2d edition. 
London ; 1766, Samuel Johnson, A Dictionary of the English Language, 3d 
edition, London; 1774, Proctor (P.) and Castieau (W.), The Modern Diction- 
ary of Arts and Sciences, . . . London. 



under "nautical"? Both interpretations are possible. 
That some at least of the dictionaries merely meant to 
specify the sphere of ordinary use would appear from the 
varying ways in which that sphere is described, as "in 
trade," "among merchants," "in trading companies," 
"among merchants, traders, and bankers," "the stock 
invested in any business, company, or institution" l 
Sometimes the restrictive term is omitted altogether. 
But, if there be still doubt whether any authorities in- 
tended to extend the use of the term outside of "busi- 
ness," it is dispelled by the following definitions, which 
expressly include all wealth whatsoever. The earliest ex- 
ample appears to be that quoted in Murray's Dictionary : 2 — 

1611, Cotgrave. — Capital, wealth, worth; a stocke, a man's prin- 
cipall or chief e substance. 

Another early example is : — 

1678, Dufresne du Cange, Glossarium. — Capitale dicitur bonum 
omne quod possidetur, praesertim vero bonorum species ilia, quae in 
pecudibus consistit. 3 

Other definitions of the same tenor are as follows: — 

1830, Lieber, F., Encyclopaedia Americana. . . . Philadelphia. — 
Capital, in political economy, is the stock of valuable exchangeable 
commodities possessed by individuals or a community. This is the 
usual and more limited meaning of the term; for, in comparing 
the capital of one individual with that of another, we have in mind 
the amount of money for which the stock of each can be exchanged. 

1841, Sandford (D. K.), Thomson (T.), and Cunningham (A.), 
The Popular Encyclopaedia. . . . Glasgow. — Capital, in political 
economy, is the stock of valuable exchangeable commodities possessed 
by individuals or a community. This is the usual and more limited 
meaning of the term. . . . 

1 Worcester (Universal and Critical Dictionary, Boston, 1846). The Italics 
are mine. 

2 J. A. H. Murray, A New English Dictionary, vol. ii., Oxford, 1893. The 
Italics in this and the succeeding definitions are mine. 

3 Quoted by Umfenbach, Das Kapital in seiner Kulturbedeutung (Wiirz- 
hurg, 1879), p. 32. 



10 



1859, Bouillet, M. N., Dictionnaire universel des sciences. . . . 
4 e edition, Paris. — Capital. On donne vulgairement ce nom a 
toute somme amassee et plus particulierement a celles qui, placees 
ou pre tees, pouvent produire interet. . . . 

1883, Simmonds, P. L., The Commercial Dictionary of Trade 
Products, Manufacturing and Technical Terms. . . . London. — 
Capital, the amount of money or property subscribed or employed 
in a joint-stock association; the money assets invested in business 
by a trading firm or individual; the net worth of a party. 

Practically the same is found in several other diction- 
aries. 1 

We see now the genesis of the term "capital." Origi- 
nally applied to the principal of a debt as distinguished 
from the interest, a fund as distinct from a flow, the pres- 
ent wealth as distinct from what grows out of it, it soon 
became applied to a merchant's stock in contradistinction 
to the flow of profits, if any, springing from it, and hence 
to any fund or stock whatever. 

III. 

This was the situation when the term "capital" was 
transmitted to the economists. Turgot accepts the mean- 
ing, and amplifies it* — 

Whoever, either from the revenue of his land, or from the wages 
of his labour or of his industry, receives each year more values than 
he needs to spend, may place this superfluity in reserve and accu- 
mulate it : these accumulated values are what is called a capital. . . . 
It is absolutely indifferent whether this sum of values or this capi- 
tal consists in a mass of metal or anything else, since the money 
represents every kind of value, just as every kind of value rep- 
resents money. 2 

i Namely: 1855, Clarke. H.. A New and Comprehensive Dictionary of the 
English Language, London; 1881, Dal, V., Defining Dictionary of the Living 
Great-Russian Language, 2d edition, St. Petersburg ; 1882, Skeat. W. W., An 
Etymological Dictionary. . . . Oxford. 

a The Formation and Distribution of Riches. § lviii., Ashley's translation 
(Macmillan, New York), pp. 50-59. 



11 

As I stated in a previous article: 1 — 

Turgot regarded capital as savings. If this term be used to 
include all commodities acquired, but not yet consumed, i.e., all 
in existence at any one time, his conception agrees precisely with 
the one here advanced. But it would seem from the passages 
previously quoted that Turgot meant to exclude all goods of "cur- 
rent " consumption. . . . Except for these differences, ... his concep- 
tion was practically the one here proposed. 

I feel more doubtful now than when the above was 
written that Turgot meant to exclude any part of the 
stock, as being used in "current consumption." Profes- 
sor Tuttle believes that he did. If so, Turgot was, like 
Knies and Tuttle, guilty either of the confusion of sub- 
tracting a flow from a fund or of an arbitrary separation 
of stock into that to be used for the immediate future 
and that reserved for the more remote future. But let 
Turgot speak for himself. In the following passage he 
expressly includes the value of land, calculating its value 
from its annual income multiplied by the number of 
years' purchase: — 

Since an estate of land of a certain revenue is but the equivalent 
of a sum of value equal to this revenue multiplied a certain number 
of times, it follows that any sum whatever of values is the equiva- 
lent of an estate of land producing a revenue equal to a definite 
fraction of that sum. . . . We have seen that every rich man is 
necessarily the possessor either of a capital in movable riches, 
or of an estate in land equivalent to a capital. Every landed 
estate is the equivalent of a capital; consequently every proprietor 
is a capitalist. 2 

In the following passage he expressly includes "all the 
other movable property" except debts: — 

But though we cannot include, in calculating the riches of a 
nation, the capital which corresponds to the interests of money 
placed on loan without reckoning it twice over, we ought to in- 

i " What is Capital ? " Economic Journal, 1896. vol. vi. p. 517. 

1 The Formation and Distribution of Riches, §§ lviii. and xciv. pp. 50, 91. 



12 



elude all the other movable property, which, although they formed 
originally the occasion of expenditure and bear no profit, never- 
theless form, from their duration, a true capital which is constantly 
accumulating and which, inasmuch as it can at need be exchanged 
for money, makes, as it were, a reserve fund which may enter into 
commerce, and, when one pleases, make up for the loss of other 
capitals. Among these may be mentioned furniture of all kinds, 
jewels, plate, paintings, statues, ready money shut up in the chests 
of misers: all these things have a value, and the sum of all these 
values may reach a considerable amount in rich nations; but, 
considerable or no, it is still true that it ought to be added to the 
sum of the price of landed estates, and to that of the advances 
circulating in enterprise of every kind, in order to make up the sum 
total of the riches of a nation. 1 

It is evident that Turgot, if he excluded any consump- 
tion goods, did not exclude much. He does not mention 
food in his list to be included; and he gives, as a reason 
for including some things, their durability, But as, on 
the other hand, he expressly includes land, and, except- 
ing debts, "all the other movable property," and as he 
ends by calling the sum of all capital the "sum total of 
the riches of a nation," it is not at all clear that he 
meant to exclude anything. 

From Turgot the stream of usage bifurcates. Popular 
language and business kept, with Turgot, faithful to the 
old tradition which closely identified capital and stock. 
A few economists, including possibly J. B. Say, did the 
same. But Adam Smith broke with tradition, and the 
force of his example was powerful enough to carry suc- 
ceeding economists with him. Mistaking the fact that 
"capital" is ordinarily a trade term for a logical restriction 
of its meaning, he identified all capital with trade-capital. 
The confusion resulting therefrom did not, however, reach 
the dictionaries at first. The earliest example which we 
find of the influence of the economists on the lexicog- 
raphers is in 1826: — 

1 The Formation and Distribution of Riches, § xcii. pp. 89, 90. 



13 



Ersch (J. S.) u. Gruber (J. G.), Allgemeine Encyclopadie. . . . 
Leipzig. — Capital oder Erwerbvorrath (Erwerbstamm, Verlag), 
wird in der Staatswirthschaft dem Verbrauchsvorrathe entgegen- 
gesetzt, und zu den drei Quellen des Einkommens (Land, Arbeit 
und Kapital) gerechnet. 

Another early example is : — 

1843, Brande, W. T., A Dictionary of Science, Literature, and 
Art. . . . New York. — Capital. In Political Economy, that portion 
of the produce of labour saved from immediate consumption which 
is employed to maintain productive labourers, or to facilitate 
production. (See Political Economy.) 

In 1846 the examples of "economic" definitions in- 
vading the dictionaries are quite numerous; and, what is 
very significant, the definitions now begin to diverge and 
conflict instead of remaining in substantial agreement 
as was the case previously. This lack of harmony is 
especially emphasized by the fact that some of the dic- 
tionaries find it necessary to distinguish between capital 
as used "in commerce" and capital as used "in political 
economy." For instance:— 

1874, Colange, L., Zell's Popular Encyclopedia, a universal dic- 
tionary. . . . Philadelphia. — Capital. (Polit. Econ.) A term ap- 
plied to that portion of the produce of labor saved from immediate 
consumption which is employed to maintain productive laborers, 
or to facilitate production. 

(Com.) Principal stock, etc., of a bank, corporation, or mone- 
tary undertaking; the sum of money which a merchant, trader, 
or other individual, embarks in any concern to form its funded 
basis, or which he contributes to the common stock of partner- 
ship; as, a capital of one million dollars. 

1888, Chambers's Encyclopaedia. . . . New edition. Edinburgh. 
— Capital, in the ordinary sense, is the means with which business 
is carried on, and may consist either of money or of property con- 
vertible into money. In the more accurate language of political 
economy, capital is wealth appropriated to reproductive employ- 
ment . . . 

1889, Whitney, W. D., The Century Dictionary, Vol. I., New 



14 



York. — Capital. ... 1. In polit. econ. that part of the produce of 
industry which, in the form either of national or of individual 
wealth, is available for further production; an accumulation of 
the products of past labor capable of being used in the support 
of present or future labor. 

2. Specifically, the wealth employed in carrying on a particular 
trade, manufacture, business, or undertaking; stock in trade; the 
actual estate, whether in money or property, which is owned and 
employed by an individual, firm, or corporation in business. . . . 
See stock. 

1893, Peck, H. T., The International Cyclopaedia. . . New 
York. — Capital, in trade and political economy, is in its restricted 
sense applied to the money, or the property convertible into 
money, with which a trader or producer carries on his business. 
In this sense Adam Smith and many other writers call it stock; 
and there is a convenience in having a separate term for expressing 
this sense of the word C, since it is totally different from its wider 
[?] sense as an element in political economy. 

1893, Murray, J. A. H., A New English Dictionary. . . . Vol. 2, 
Oxford. — Capital. B. sb. 3. A capital stock or fund. a. Com- 
merce. The stock of a company, corporation, or individual 
with which they enter into business and on which profits or divi- 
dends are calculated; in a joint-stock company, it consists of the 
total sum of the contributions of the shareholders, b. Pol. Econ. 
The accumulated wealth of an individual, company, or community, 
used as a fund for carrying on fresh production; wealth in any 
form used to help in producing more wealth. 

These dictionaries would seem to show that the original 
meaning of capital as stock still prevails in commercial 
and popular use. Business men who have been consulted 
confirm this. It would astonish a business man to have 
an economist strike out from his assets as non-capital 
his raw materials, as would Kleinwachter, his perishable 
goods, as would Hermann, his fuel, as would Walras, or, 
above all, his land, as would most of the classical econo- 
mists. That land is capital they all emphatically declare. 
As a manufacturer expressed it, the land is the very first 
thing into which the paid in capital of a new concern is 
converted. Again, they maintain that the function of 



15 

capital has nothing to do with its meaning. It need not 
be ''for production" or "for sustaining laborers," nor 
for any particular object whatever. The only point on 
which some of them hesitate is whether or not all articles 
in consumers' hands are capital. The reason for this 
hesitation may possibly be found in the customs of book- 
keeping. As one business friend expressed it, " Capital is 
simply a book-keeping term." The business man natur- 
ally associates the term with his shop and not his 
home, for he keeps a balance sheet in the former and not 
in the latter; but, once given a balance sheet, it does not 
matter what purpose is behind it. A social club, an art 
gallery, or a hospital, may have a capital. It is even said 
that in one year a joint stock company with capital stock 
was organized to build the yacht for defending the 
America's cup. If a private family should call itself a 
joint stock company and draw up a balance sheet, enter- 
ing all its property, house, furniture, provisions, etc., on 
one side, with the debts on the other, no business man, I 
imagine, would hesitate to call the balance of assets over 
liabilities "capital." Even as it is, business men do not 
object, when their attention is called to the matter, to 
extend the application of the term capital beyond the 
limits of trade-capital. One representative business man 
said, "Capital isn't a part of wealth, but all a man has 
got, including his automobile." "Is that cigar in your 
mouth capital?" I asked. "No," he said hesitatingly. 
But this opinion he quickly reversed as inconsistent with 
his first statement, and because he was made to see that 
a box of cigars and each cigar in it, or out of it for that 
matter, was a part of his stock or reserve. 

It ought now to be clear what the course of history has 
been. Business and popular usage has preserved a very 
consistent tradition from 1678 — when capital meant, 
among other things, "all goods which are possessed" — 



16 

to 1883, when it still meant "the net worth of a party." 
The other meanings, principal loaned, stock in trade, 
capital stock, etc., were special applications rather than 
contradictions of this broader meaning. But Adam 
Smith turned aside from this beaten track. Following 
him came the other economists; but, as their master's 
trail led nowhere, each set out through trackless wilds 
on a path of his own. This wandering in the wilderness 
has now continued so long that a return to the beaten 
track seems itself a desertion of tradition! And yet in 
no other way can economists get into that harmonious 
relation with business facts and methods which most of 
us so earnestly desire. 

It is true that a few seem to think that the needs of 
business men and economists are so different that "capi- 
tal" should have a distinct meaning in the two fields. 
Professor Nicholson objects to identifying capital with 
stock, because this definition "seems rather adapted to 
accounting than economics." * Now if there is any feature 
of the business world which contains lessons for the econo- 
mist, it is business book-keeping. Long and hard prac- 
tical experience has developed the business man's methods 
of accounting. He has acquired in these matters an 
almost unerring instinct for truth. The wage-fund theory 
could scarcely have befogged economists, had they known 
how to keep reckoning of funds in "capital accounts" 
and of wages in "income accounts." So also the confused 
double counting of "income" by economists can be obvi- 
ated by a little familiarity with double entry book-keeping. 2 

IV. 

But for those who prefer academic tradition to business 
tradition it may be argued that, among the contradictory 
definitions in the text-books, the definition of capital here 

1 Elements of Political Economy (Macmillan, 1903). p. 44. 

2 See "The Role of Capital in Economic Theory," Economic Journal, De- 



17 

advocated finds almost as much favor among economists 
as most of its competitors. Following Turgot came pos- 
sibly J. B. Say, 1 and certainly Courcelle-Seneuil 2 and 
Guyot. 3 Edwin Cannan, among present economists, re- 
introduced it. To-day it is used in four or five stand- 
ard works, 4 as well as in some minor writings. Many 
economists have orally expressed their approval of the 
proposed definition. 

Others virtually or nearly adopt it, as, for instance, 
Knies, 5 Clark, 5 Pareto, 5 Giffen, 6 De Foville, 7 Nicholson, 8 
as well as my three critics. Professor Marshall says 
that in earlier years he "invariably thought of capital 
as the whole stock of goods, and of interest as the 
whole of the usance or benefits derived from the use of 
that stock" 9 ; that, "when one approaches the problem of 
distribution from the mathematical point of view, there 
is practically no choice" 10 but to do so; and that "wealth 
in the form of houses or private carriages helped to give 
employment to labour as much as when in the form of 
hotels or cabs." u He expressly concedes what is really 
my chief contention when he says, "I concur in his [my] 
conclusion that whatever we do with the word capital, we 

cember, 1897 ; Economics and Accountancy, by Victor Branford, London (Gee 
& Co., 62 Moorgate Street, E. C), 1901. 

!See Tuttle, "The Real Capital Concept," Quarterly Journal of Eco- 
nomics, November, 1903, p. 83; but cf. Bohm-Bawerk, Positive Theory, English 
translation, p. 59, n. 

2 Traite the'orique et pratique d'economie politique, 1867, tome i. p. 47. 

s Principles of Social Economy, English translation, p. 50. 

4 Among those which now occur to me are Cannan's History of TJieories of 
Distribution, Hadley's Economics, Smart's Distribution of Income, Daniels's 
Finance. 

s See " What is Capital ? " Economic Journal, December, 1896. 

6 In his Growth of Capital. 

1 1n his "Wealth of France and of Other Countries," English translation. 
Journal of the Royal Statistical Society, 1894. 

8 In his Elements, pp. 42, 43. 

9 " Distribution and Exchange," Economic Journal, 1898, p. 56. 
v>Ibid., p. 55. nibid., p. 57. 



18 

cannot solve problems of capital by classifying wealth." 1 
Yet he "concluded, not without doubt, that it is best to" 2 
base his definition of capital on such a classification, purely 
out of deference to what he conceives to be the dominant 
usage. 

Professor Fetter includes under capital all wealth when 
converted into money value. "Wealth and capital con- 
sist in precisely the same things." 3 By wealth he means 
stocks of wealth, each kind being measured in its own 
unit, — yards, tons, acres, etc., — and by capital the value 
of this stock. His capital is therefore identical with one 
of my senses of capital; namely, "capital-value." 4 In 
a very excellent paper, 5 which has recently appeared, 
Fetter emphasizes, with Clark, the fact that rent and in- 
terest apply equally to all goods, the one to the things 
themselves, the other to their value. 

Professor Tuttle includes under capital the value of 
land, dwellings, automobiles, and all considerable stores 
of wealth of any kind, and yet not quite all wealth. I 
confess I do not understand what, or rather how much, 
he intends to exclude. His definition of capital, "sur- 
plus wealth 6 as a possession," although somewhat vague, 
seems entirely acceptable, and, if literally interpreted, is 
exactly equivalent to the value of the "stock of wealth 
existing at an instant of time." But the term "surplus" 
has been used in so many senses that it always needs in- 
terpretation. Business men use it in both income accounts 

1 " Distribution and Exchange," Economic Journal, 1898, p. 59. 
^ Ibid., p. 56. 

3 "Recent Discussion of the Capital Concept," Quarterly Journal of Eco- 
nomics, vol. xv. p. 42, November, 1900. 

*See "Senses of Capital," Economic Journal, June, 1897. 

5 "The Relations between Rent and Interest," a paper presented before the 
American Economic Association, December, 1903. Cf. Clark, Capital and its 
Earnings, p. 27, and Distribution of Wealth (Macmillan, 1899). chaps, ix. and 
xiii. Cannan developed the same idea in " What is Capital ? " Economic 
Journal, June, 1897. Cf. my " Role of Capital ," Economic Journal, December, 
1897. pp. 524, 526. 

6 By " wealth " Professor Tuttle means its value. 



19 

and capital accounts. A natural interpretation would 
seem to be what still remains over and above what has 
been already consumed, or, in other words, what at any 
instant of time survives destruction. "Surplus wealth as 
a possession" would then mean simply surviving or ex- 
isting wealth. But this interpretation Professor Tuttle 
expressly rejects. He omits from a stock of wealth 
"what is required for the satisfaction of current wants." l 
But it is evident that wealth used for "current" consump- 
tion must mean either what has been or is to be con- 
sumed. No finite amount can be consumed in "the 
present"; for the present is only a point, and all consump- 
tion requires time. If, then, surplus wealth does not 
mean what is left after past consumption, it must mean 
what is left after subtracting from the present stock some 
amount which is destined for future consumption. But 
are we to subtract what is to be used to-day, next week, 
next month, or next year ? 2 Unless this question be 
definitely answered, the restriction that capital must be 
a surplus seems to be little more than the Hibernian state- 
ment that no one has any capital unless he has a great 
deal. It is, of course, true that "capital" is popularly 
applied to large rather than small amounts; and "capital- 
ist" is popularly opposed to laborer, even if the latter 
has a savings-bank deposit. But such a use of terms is 
too loose to serve as a basis for definition. Among all 
the dictionaries which have attempted to reflect the popu- 
lar use of the term "capital," only four have been found 
which distinguish capital as a "large" stock. All of these 
are Russian. 3 

1 Quarterly Journal of Economics, November, 1903, p. 78; see also pp. 
60, 79. 

2 At one point (p. 79) Professor Tuttle seems to refer to Bohm-Bawerk's 
"production period" as the time in question. He can scarcely intend this, 
however, since the amount consumed during that period is about double the 
whole stock of wealth itself (excluding land)! See Bohm-Bawerk, Positive 
Theory of Capital, English translation (Macmillan, 1891), pp. 327, 426. 

»1867, St. Petersburg, Imp. Acad, of Sci., Dictionary of the Slavonic 



20 

Professor Tuttle's reference to the simile of the lake 
and river and his criticism of my use of it 1 sound some- 
what like the oft-met-with confusion between a stock and 
a flow. Most certainly should the contents, at any instant, 
of "the inflowing and outflowing streams" 2 be added 
to the contents of the lake. The distinction between 
capital and income is not like the mere relative distinction 
between lakes and rivers, but is like the absolute distinc- 
tion between the amount of water at an instant of time (in 
lake or river), on the one hand, and the flow of water dur- 
ing a period of time (through lake or river), on the other. 
The two sets of distinctions are not in the least coincident. 
A lake has a flow as truly as a river, and a river has a 

and Russian Language, 2d edition.— Kapital. 1. A considerable sum of 
money. 

1874, Berezin, I. N., Russian Encyclopedic Dictionary.— Kapital, a large 
sum of money bearing interest. 

1878, Kliushnikov, V., Universal Cyclopedic Dictionary.— Kapital, a large 
sum of money bearing interest. 

1881-82, Kartashev & Belski.— Kapital. . . . l. Large sum of ready money. 

1 " It is important to note that Professor Fisher's conception of a ' stock ' is 
much broader than that of Adam Smith. To the latter the idea of a surplus 
is the fundamental characteristic of stock, while to the former 'stock' com- 
prises all economic goods in existence at a given instant. To illustrate, while 
to Adam Smith, on the one hand, ' stock ' corresponds to the pond of water,— 
the accumulated surplus of the inflow over the outflow,— to Professor Fisher, 
on the other hand, it is the pond of water plus the inflowing and outflowing 
streams at an instant of time. Yet, in spite of his definition, Professor Fisher 
unconsciously lapses into Adam Smith's conception of 'stock.' He does this 
when he illustrates that his distinction between a ' stock ' and a ' rate of flow ' 
' brings capital into the simplest and most intimate relation to interest.' He 
says: — 

" ' When a stock of goods or capital is exchanged for a perpetual flow of 
goods or income, the ratio of exchange constitutes the rate of interest. If 
£100 will buy an income of £3 per year, or if 100 tons of beef are worth a per- 
petual supply of 3 tons annually, the rate of interest is 3 per cent, per year.' 

"What makes it possible, we ask, to exchange £100 for an income of £3 per 
year? Is it simply the fact that £100 is in ' existence at a given instant of 
time ' ? Certainly not : it is because £100 exists under such conditions that it 
is possible to use it to buy an income. In other words, it must exist as a sur- 
plus." " The Real Capital Concept," Quarterly Journal of Economics, vol. 
xviii., November, 1903, pp. 75, 76. 

The answer to this last is: All wealth is used "to buy [or otherwise obtain] 
an income," whether use-income or contract-interest. Existence as wealth is 
sufficient to make this possible. See Economic Journal, December, 1897, 
p. 525. 

2 See last note. 



21 

stock as truly as a lake. 1 Rivers and lakes differ only in 
degree: stocks and flows differ in kind. The one distinc- 
tion is merely classificatory, and is used in descriptive 
geography: the other is analytical, and is used in rational 
physics. It is precisely for the purpose of ridding rational 
economics of classificatory definitions of capital and sub- 
stituting an analytical one — to show that capital and in- 
come differ in kind, not in degree — that I have been 
striving in this and former articles. 

Distinctions of classification of course have their place. 
In fact, most of the distinctions which have partitioned 
stock into so-called capital and non-capital are valid for 
descriptive purposes, even when the line cannot be drawn 
with precision. "Land" is different from other wealth; 
"durable" goods are a fairly distinct category; there is 
a difference between goods associated with production 
and those associated with consumption. Of all such 
dividing lines one of the most natural and important 
seems to be that which separates business wealth from 
private wealth. I should call the two trade-capital and 
personal-capital. This distinction, as Komorzynski 2 says, 
is what many definitions of "capital" are seeking. But I 
submit that neither this nor any other line of demarcation 
helps us in the least to solve "the problems of capital." 
For this purpose they are as barren as is the distinction 
between lakes and rivers to solve the problems of hydro- 
dynamics. 

Except for the few differences in points of doctrine 
already mentioned, the disagreements between my critics 
and myself are purely as to terms. Professor Marshall 
and Professor Fetter object to my use of the term "capi- 
tal" because it is thereby made a synonym of wealth. 
This, however, is scarcely correct. The quantity of wheat 

1 Cf. " What is Capital ? " Economic Journal, December, 1896, pp. 516, 517. 

2 Die Nationalokonomische Lehre vom Credit (Innsbruck, 1903), p. 135. 



22 

exported during 1903 was certainly wealth, yet it was not 
a stock of wealth existing at an instant of time. Again, 
Professor Tuttle and Professor Fetter, following Professor 
Clark's example, are very insistent that capital should be 
applied only to the value of stock, and not to the concrete 
objects of which it is composed, rightly remarking that the 
two concepts play a totally different role. But it would 
seem that the important distinction between them is even 
more explicitly marked by calling the concrete stock 
capital-wealth, and its value, capital-value. It seems to be 
thought that business men never apply the term " capi- 
tal" to concrete wealth; but this is an error. The dic- 
tionaries also supply precedent for so applying the term. 1 

In spite of all the differences between us, verbal or actual, 
the writings of my three critics follow a common trend of 
thought away from the partial views of capital which we 
have inherited from Adam Smith. In fact, on the really 
important issue we are all, I think, agreed; namely, that 
we cannot solve the problems of capital by classifying wealth 
in kinds or categories. But Professor Marshall hesitates 
to harmonize his use of the term "capital" with his con- 
ception of the problems of capital, while Professor Fetter 
and Professor Tuttle restrict the application of the term 
to the value of the stock as against the concrete objects 
of which it is composed. Finally, Professor Tuttle re- 
stricts the term still further by striking out stocks too 
small to be called a "surplus." 

Thus, under slightly different terms, we find essentially 

1 See, for instance: — 

1857, G. Ripley and B. Taylor, The Home Cyclopedia, New York. 
1879, Stormouth, Etymological and Pronouncing Dictionary. 
1883, Simmonds, Commercial Dictionary, London. 

1888, Chambers's Encyclopaedia, new edition, Edinburgh. 

1889, Century Dictionary, New York. 

1893, Funk's Standard Dictionary, New York. 
1901, Webster's International Dictionary. 

All these admit concrete stock as one of the senses of capital employed in 
commerce. Many other dictionaries admit it as used " in political economy." 



Idf2. 



23 

the same conceptions; and unity of conceptions is chiefly 
important. Be it said that this paper is written not in 
the interests of a purist nomenclature, but in the hope of 
removing certain verbal obstacles which now block the 
way to important ideas. What meanings are attached to 
the words "capital" and "income" would be of slight 
consequence were it not that the present usage (or lack 
of usage) prevents economists from exploiting the ideas 
of "stock" and "flow." Words and ideas usually move 
together, and it can scarcely be expected that those who 
feel obliged to define the word " capital " as a part of stock 
will nevertheless, like Marshall, proceed to treat the " prob- 
lems of capital" with reference to the whole. 1 It is simpler 
and less confusing to first square our words with our ideas. 
We now see that this can be done with a clear conscience, 
for to do so will square them with precedent also. 



i Among those who have pursued this paradoxical course, however, must 
be included: John Rae, whose definition of capital (New Principles of Politi- 
cal Economy, 1834, p. 171) has nothing to do with his thoroughgoing and 
admirable analysis of interest, which he connects entirely with "stock" ; and 
Bohm-Bawerk, the inadequacy of whose definition of capital is manifested 
by frequent extension of his principles of capital to land (e.g.. Positive Theory, 
English translation, p. 320, n.) and by recourse to "the subsistence fund," or 
general stock of wealth, for essential parts of his interest theory (ibid., pp. 322, 
325, etc.). 



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